Article

The Ultimate Secret for Success in Stock Trading

25 Apr 2019

When King Ptolemy asked the great mathematician, Euclid, for a simpler approach to geometry, Euclid responded, “Your Highness, there is no royal road to geometry”. What was said about geometry many centuries ago is equally applicable to stock trading. There is no short cut to success in stock trading. So, what is the secret success formula that we are looking for? The secret to your trading success is not in the stock or in your online stock broker. It is entirely with you.

The legendary trader, Jesse Livermore, has laid out a complete set of rules for success in the stock markets. If we were to summarize all these trading secrets, we can put them into four key points.

As a trader, always listen to the markets

Every time the market has a story to tell. As a trader, it is your primary job to interpret the market cues and trade accordingly. The trader has to base his performance on facts and not on opinions. As a trader, you must avoid the temptation of trying to be contrarian in the market. If you are bullish and the market is falling, it is basically giving you a message that you have missed out key factors. Listen to the message and modify stance accordingly.

Be thorough in your research

We often believe that traders do not have to research stocks and it is only for the long term investors. That is not true. Even a trader needs to understand the many facets of the stock like company performance, balance sheet strength, impact of news flows, technical charts, among others. That is the only way you can interpret signals and project how the stock will react to news and earning flows. One of the basic secrets here is to start small and then build positions as you build your conviction. Remember that profits are never made in all trades but in a handful of trades. Make them count. Hold on to your profits long enough and cut your losses fast. That is only possible through in-depth research into stocks and markets.

Spread your trades adequately

Don’t concentrate all your capital on just a few trades. While it is necessary that you keep your universe of stocks limited since that is the only way you can trade with insights, but don’t try and focus all your capital on just one or two stocks or themes. For example, if all your trades are focused on banks, NBFCs, autos and realty, then your trades are really sensitive to interest rates. If the RBI announces a hike in the repo rates then all your trading positions will be impacted and losses could be larger than you anticipated. The idea of diversification in trading is to ensure that your trading book is not dependent on just one or two events.

Finally, it all boils down to discipline

You cannot make success of your stock trading activity unless you instill discipline at every level. Firstly, you need discipline on capital protection. Work out the various levels of losses that you are willing to take on an intraday, weekly and overall basis. The moment these levels are hit, have the discipline to shut down your terminal and revisit your strategy. Secondly, stop loss and profit targets are an absolute necessity. You can never be a successful trader unless these two disciplines are instilled. Thirdly, have the discipline of separating capital money and profit money. The levels of risk you can afford to take on both these differ.

Ironically, the best of traders are those who get these basic rules right. Trading is not about adding on risks but a lot more about managing risks. Take care of the risks and the returns will take care of itself!

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The Ultimate Secret for Success in Stock Trading

25 Apr 2019

When King Ptolemy asked the great mathematician, Euclid, for a simpler approach to geometry, Euclid responded, “Your Highness, there is no royal road to geometry”. What was said about geometry many centuries ago is equally applicable to stock trading. There is no short cut to success in stock trading. So, what is the secret success formula that we are looking for? The secret to your trading success is not in the stock or in your online stock broker. It is entirely with you.

The legendary trader, Jesse Livermore, has laid out a complete set of rules for success in the stock markets. If we were to summarize all these trading secrets, we can put them into four key points.

As a trader, always listen to the markets

Every time the market has a story to tell. As a trader, it is your primary job to interpret the market cues and trade accordingly. The trader has to base his performance on facts and not on opinions. As a trader, you must avoid the temptation of trying to be contrarian in the market. If you are bullish and the market is falling, it is basically giving you a message that you have missed out key factors. Listen to the message and modify stance accordingly.

Be thorough in your research

We often believe that traders do not have to research stocks and it is only for the long term investors. That is not true. Even a trader needs to understand the many facets of the stock like company performance, balance sheet strength, impact of news flows, technical charts, among others. That is the only way you can interpret signals and project how the stock will react to news and earning flows. One of the basic secrets here is to start small and then build positions as you build your conviction. Remember that profits are never made in all trades but in a handful of trades. Make them count. Hold on to your profits long enough and cut your losses fast. That is only possible through in-depth research into stocks and markets.

Spread your trades adequately

Don’t concentrate all your capital on just a few trades. While it is necessary that you keep your universe of stocks limited since that is the only way you can trade with insights, but don’t try and focus all your capital on just one or two stocks or themes. For example, if all your trades are focused on banks, NBFCs, autos and realty, then your trades are really sensitive to interest rates. If the RBI announces a hike in the repo rates then all your trading positions will be impacted and losses could be larger than you anticipated. The idea of diversification in trading is to ensure that your trading book is not dependent on just one or two events.

Finally, it all boils down to discipline

You cannot make success of your stock trading activity unless you instill discipline at every level. Firstly, you need discipline on capital protection. Work out the various levels of losses that you are willing to take on an intraday, weekly and overall basis. The moment these levels are hit, have the discipline to shut down your terminal and revisit your strategy. Secondly, stop loss and profit targets are an absolute necessity. You can never be a successful trader unless these two disciplines are instilled. Thirdly, have the discipline of separating capital money and profit money. The levels of risk you can afford to take on both these differ.

Ironically, the best of traders are those who get these basic rules right. Trading is not about adding on risks but a lot more about managing risks. Take care of the risks and the returns will take care of itself!